- RBI can manage bond markets but not currency or equities, says Shankar Sharma
- Defending the rupee with foreign reserves is unsustainable and costly
- Equity markets should be allowed to find their own floor without intervention
Veteran investor Shankar Sharma, speaking at NDTV Profit's Townhall Event, drew a sharp line between what the RBI can realistically defend and what it should simply let go, as the markets continue to see a sustained period of drawdown.
Sharma argued that while the central bank has the tools to manage the bond market, the same cannot be said for the currency or equities, both of which are shaped by forces far beyond domestic control.
"RBI can easily manage the bond market, but currency and equities are more global in nature," he told NDTV Profit's Managing Editor, Tamanna Inamdar.
On the rupee, he was blunt: defending the currency using foreign reserves is a losing game. "Can't use rented money to defend currency; the cost is too high."
The equity market, he suggested, should be allowed to find its own floor. In Sharma's view, a sharp correction is not something to fear. It is, in fact, the very trigger that brings foreign capital back in. "Let the market fall; FIIs walk in when there is a big market crash," he said.
On the question of how to manage FII behaviour structurally, Sharma pointed to taxation as the most effective lever. "FII taxation is the best mechanism to disincentivise the equity train," he added.
Sharma also raised a more fundamental question about whether India's equity culture is appropriate for its stage of development, arguing that stock markets are a feature of wealthy economies. "India is a low income country. Equity markets are for high income countries," he said.
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